Pre-Budget Fiscal Outlook: a Quick Guide

The 2017–18 Mid-Year and Economic
and Fiscal Outlook (MYEFO) is the latest fiscal forecast released by the
Government ahead of next week’s Budget. MYEFO confirmed the Government’s plan
to return the Budget to surplus by 2020–21, an intention that is expected to be
confirmed in the upcoming Budget.

MYEFO forecast that the budget balance is expected to
increase from an estimated deficit of $23.6 billion in 2017–18 to a
surplus of around $10 billion in 2020–21. The return to surplus is predicated
on both increases in government receipts as well as restraining growth in
government payments. Total government receipts were expected to grow from
$437.1 billion in 2017–18 (24.0 per cent of GDP) to a projected $525.6
billion in 2020–21 (25.4 per cent of GDP). Over the same period,
payments by the Australian Government were expected to increase in nominal
terms from $457.6 billion to $515 billion, but to fall slightly as a percentage
of GDP from 25.2 per cent in 2017–18 to 24.9 per cent in 2020–21.

Indications from monthly budget reporting data is that the fiscal position to date in 2017–18 is
stronger than was forecast in MYEFO. Receipts to the end of March 2018 were
$5.3 billion higher than anticipated in MYEFO (including an additional $1.8
billion from personal income tax, $0.95 billion from company taxes and $0.7 billion
from GST) and total payments were $2.7 billion lower than in MYEFO.

Commentators have speculated that this
better-than-expected result will mean that next week’s Budget will include
upwards revisions in underlying revenue forecasts and downwards revisions in
underlying expenses, giving the Government room to provide tax cuts, increase
spending or project larger surpluses.[1]

Receipts

Personal income tax is the largest source of government receipts, at just under half of
all government receipts.[2]
At MYEFO it was predominantly personal income taxes that were expected to drive
the strong increases in government receipts, and ultimately fiscal
consolidation, over the forward estimates period.

Improved macro-economic conditions, including stronger
employment levels and an anticipated improvement in wages growth, would be
expected to increase personal income tax receipt forecasts in the Budget.
However, the Government has announced a few policies in advance of the Budget
which will counteract this revenue growth. The Government has announced that
due to a better fiscal position it no longer intends to increase the Medicare
Levy to fund the National Disability Insurance Scheme.[3] Further, in a recent speech,
Treasurer Scott Morrison announced that the Government will implement personal
income tax cuts, initially for low and middle-income earners.[4]
There have been reports in the media that these will be phased in over ten
years to avoid affecting the projected return to surplus.[5]

The overall impact on personal income tax in the
Budget will depend on the offsetting effects of these policy decisions (notably
the size of the personal income tax cuts and how they are phased in) and the
expected upward revisions in personal income tax receipts as a result of
stronger macro-economic conditions.

Corporate tax receipts make up just under 20 per cent of government receipts
and are also expected to contribute strongly to growth in receipts over the
forward estimates period as a result of strong private sector investment and
higher commodity prices.[6]

Indirect taxes are
also likely to grow strongly over the forward estimates period on the back of
increased GST receipts. However, GST is fully distributed to the states (net of
administration expenditures) and is not expected to contribute to the
Commonwealth’s fiscal position in net terms.

Payments

Payments are presented in two different ways under the
Government Finance Statistics framework:

Presented on an economic basis
- shows payments on the basis of economic purpose, such as transferring
payments from the Commonwealth to other sectors, paying wages for public
servants or purchasing goods and services.

Presented on a functional basis
- shows payments on the basis of the functions that Government performs;
for example, payments for defence, health or education.

Both presentations are interesting because they
provide a sense of what the Government is spending money on, and for what
purposes.

The largest payment from the Budget (on an economic
presentation basis) is current transfers between the Commonwealth
Government and other sectors of the economy, which includes payments to the
states and territories; the private sector; overseas entities; non-profit
organisations; and subsidy payments and benefits—including payments to the
aged; veterans; people with disabilities; families; the unemployed; students
and vocational training. Current transfers are anticipated to account for
$280.5 billion of expenses, or 60 per cent of total expenses (15.4 per cent of
GDP) in 2017–18, increasing to $310.7 billion in 2018–19 (a slight decline
to 15 per cent of GDP).

The largest payment in the Budget (on a functional
presentation basis) is social security and welfare (including pensions),
at around 35 per cent of total government payments. These payments are forecast
to increase from around $164 billion in 2017–18 to $187.4 billion in 2020–21,
maintaining at around nine per cent of GDP.

Other categories that exceed one per cent of GDP, and
make up a total of 11.3 per cent of GDP, include intergovernmental transfers
(3.5 per cent), health (4.2 per cent), education (1.9 per cent) and defence
(1.7 per cent). The remaining 21 categories account for the residual 5.4 percentage
points of GDP. These payments are expected to stay relatively stable as a
percentage of GDP over the forward estimates period.

Key fiscal charts

The
Budget is expected to be back in surplus by 2020–21, which will be the first
Budget surplus since 2006–07.

MYEFO
projected an improvement in the fiscal position from a deficit of
$23.6 billion in 2017–18 (1.3 per cent of GDP) to a surplus of
$10 billion (0.5 per cent of GDP) in 2020–21.

Figure 1: underlying cash balance (% of GDP)

Other
measures of fiscal balance provide insight into the impact of Government on
the economy.

The
net operating balance (NOB) measures the sustainability of the Government’s
fiscal position and is an indication of the sustainability of the level of
government services. In the short term the NOB is in deficit by 1 per cent of
GDP.

The
fiscal balance (FB) approximates the contribution of the Australian general
government sector to the current account balance in the balance of payments.
In the short term the FB is in deficit by 1 per cent of GDP.

Both
measures are expected to improve over the budget cycle.

Figure 2: fiscal balances (% of GDP)

Achieving
a surplus depends on closing the gap between payments and receipts.

Strong
growth in receipts is expected to be the main driver of fiscal consolidation
over the forward estimates period. Growth in payments is expected to be
constrained over the forward estimates period.

Figure 3: receipts and payments (% of GDP)

Deficits
will contribute to gross borrowing, which are offset by investments. Net debt
is how these differences are measured.

Net
debt will sit at $343.8 billion in
2017–18, or around 18.9 per cent of GDP. Relatively lower deficits, or actual
surpluses will moderate the net debt result.

The
difference between all assets and all liabilities is measured by net worth.
On current settings, the Australian Government has more liabilities than
assets, and has a negative net worth of $310.7 billion, equivalent to 17.1
per cent of GDP.

The
difference between financial assets and liabilities is measured by net worth.
On current settings, the Australian Government has more financial liabilities
than assets, and has a negative net financial worth of $451.3 billion, equivalent
to 24.8 per cent of GDP.

Figure 4: net debt (% of GDP)

Personal
income taxes (including capital gains tax (CGT) paid by individuals) account
for just under half of government revenues.

A
total of 19 per cent comes from taxes on companies (including CGT and
resource rent taxes).

Figure 5: government receipts (% of revenue)

Personal
income tax receipts were anticipated to grow to their highest level as a
proportion of GDP since 1999–2000
on the back of strong employment and better wages growth.

The
Budget is expected to include measures which deliver cuts in personal income
tax rates over the next decade and reverse the Government’s previous
policy to increase the Medicare Levy.

Figure 6: personal income tax (% of GDP)

Corporate
income tax receipts were anticipated to grow to their highest level as a
proportion of GDP since 2008–09 on
the back of strong
non-mining investment, increased corporate profitability and higher
commodities prices.

Figure 7: corporate income tax (% of GDP)

Current
transfers account for 60 per cent of total payments. Many of these payments
are made under special appropriations.

Supplies
and services account for 22 per cent of payments. These include payments to
suppliers, contractors and consultants, operating leases, health care
payments and indirect personal benefits.

The ten largest individual payment categories are
wages and salaries; supply of goods and services; indirect personal benefits;
government debt interest; current transfers to state and territory
governments; transfers across multiple jurisdictions; subsidy expenses;
assistance to the aged; assistance to people with disabilities; and
assistance to families with children.

Figure 8: government economic payments (% of total)

In
terms of functions, social security and welfare account for 35 per cent of
expenses.

The
next largest single category is health, accounting for 16 per cent.

The
category ‘other purposes’ accounts for 19 per cent, but this includes items
such as public debt interest superannuation interest and the transfer of
goods and services tax to the states.

The
ten largest individual functional expenditures are social security and
welfare; health; GST transfers; education; defence; public debt interest;
transport and communication; superannuation interest; fuel and energy; and
financial and fiscal affairs.

Figure 9: government functional payments (% of
total)

The
largest areas of functional expenditure by the Commonwealth Government are
social security and welfare, health, education and defence. These are
expected to remain relatively stable as a percentage of GDP over the forward
estimates period.

Figure 10: government payments (% of GDP)

Increases
in net debt affect net interest payments which are measured over the
long-term in budget papers.

Net
interest payments are around $13.4 billion in 2017–18, equivalent to around
0.7 per cent of GDP. This is the highest level since 2001–02, consistent with
net debt sitting at a peak of 18.9 per cent of GDP.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

This work has been prepared to support the work of the Australian Parliament using information available at the time of production. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Enquiry Point for referral.